Toby Egbuna
May 2nd, 2024

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Last week, I wrote about why Black Founders shouldn’t raise VC.

Well, if you shouldn’t raise VC and you don’t want to bootstrap it all the way, what type of funding should you go after?

Introducing: patient capital.

What is patient capital?

Patient capital is a form of investing in which investors don’t have a set timeline before they expect a return. In simple terms, patient capital investors are just that—patient. They still expect a return on their investment, but they don’t have hard and fast rules like venture capital investors.

How is patient capital different from venture capital?

There are a few notable differences:

Time horizon

Patient capital doesn’t have a set timeline; it could be 3-5 years or 10-15 years. Alternatively, a patient capital investor might be okay with investing in a company that grows to profitability and gives dividends to its investors regularly.

As mentioned above, venture capitalists are looking for an exit event in 7-10 years. Anything longer than that qualifies the company as a “zombie,” meaning that the investors will likely stop keeping up with the company and move to prioritize companies that are growing closer to this route.

Expectations and focuses

Patient capitalists don’t have set expectations but often prioritize financial and impact outcomes.

Traditional venture capitalists are focused solely on financial returns. They want every company they invest in to make decisions that grow the company and increase valuations.

Approaches

Patient capital investors likely have a targeted approach. They make very few investments, and they are very careful about the investments that they make.

Venture capital investors have a spray-and-pray approach. With each fund a VC raises, they aim to invest in many companies, hoping to find the 1-2 that will have that 100-1000x return that returns the fund.

Types of Patient Capital Investors

Patient capital investors can be traditional funds with partners and LPs, but they can take a few other forms:

1. Angels - individual angel investors can be patient capitalists. Sure, some angel investors look to invest early in high-growth venture startups. Still, those same angel investors might be interested in funding a company that aims to grow to $10M a year in revenue and throw off $1-2M/year in profit. If you think about it, this is basically what anyone investing in a small business does.

2. Family offices - wealthy families sometimes set up family offices that invest in companies. Make no mistake, some of these companies will invest in venture-backed startups (the same way angel investors do). However, since they don’t operate with a thesis like VCs do, they can also invest in companies with clear lines to profitability and sustainable growth.

3. Impact investment funds - Most of the time, there is a conflict of interest for for-profit companies looking to impact the world positively. Founders often have to pick impact or financial returns. Impact investment funds consider the long-term social impact of the companies they invest in and the potential financial returns, making them an ideal type of patient capital investor if you’re building a mission-driven business.

4. Corporate venture capital funds - Corporate venture capital arms like Salesforce Ventures or Slack Fund qualify as patient capital because they often invest intending to find innovation for their businesses. While they would want to invest in companies that can grow quickly, they are more likely to prioritize the product the company is creating than the financial outcomes, meaning that they’re okay with waiting for the company to mature.

Why (most) underrepresented founders should pursue patient capital

I’ve said it before, but most Black founders pursue VC not because they want to but because it’s the only path towards the $500k+ they need to build a business.

Patient capital is the ideal funding source for underrepresented founders for three reasons: the investors have more realistic outcomes, flexibility for the founder, and the funders are in it for the long haul.

More realistic outcomes

VC is about finding the one in one thousand company that can reach that billion-dollar valuation.

I hate those odds. To venture capitalists, every company is just another one on the list. And some founders with less on the line look at their companies similarly. They know that if this doesn’t work out, they can raise more money and start a new one.

Most underrepresented founders are not thinking this way. They’re pouring their savings into this company and maybe even the savings of their loved ones. Their companies have to work out.

A typical Black founder would be ecstatic about building a company that generates $10M a year in revenue and $1-2M a year in profit. A patient capital investor would also be happy with this outcome.

You know who wouldn’t? A VC.

VCs' desired outcomes are flat-out unrealistic. Most founders will fall far short of the coveted $1B valuation and are better suited for a patient capital investor who is more than happy with ‘just’ building a profitable, sustainable business.

More flexibility

Taking patient capital doesn’t mean a founder can’t turn to VC later.

Let’s say you build that company that does $10M a year in revenue, and in your fifth year, you start to grow faster than you anticipated. The next year, you’re doing $20M, and it becomes clear that there’s a path to $50 or $75M. You believe you have the team and conviction to blow it up.

Taking patient capital means that you probably didn’t raise multiple rounds of funding, and therefore, you have control of your company to raise VC. Your patient capital investors can stay on for the ride or sell shares in the secondary market to earn a return on their investment, and you get the money you need to turn on the jets 🚀.

More long-term support

Disclaimer: not every VC is this cold. But I’ve heard enough stories to know that it’s worth addressing.

There are fair-weather VCs out there. People who invest and support you when it’s clear that your company is growing the way they want it to, but then stop answering your calls when things start to slow down or when you hit a wall.

Because patient capital investors don’t have the same sorts of expectations, they’re more likely to be with you when things get tough. And trust me, building a company is hard. You’re going to want people in your corner the entire time.

Three patient capital investors to check out

If you’re interested in pursuing patient capital, here are some investors to consider.

Collab Capital

Collab Capital offers a SPACE (Shared Profit and Collaborative Endorsement) agreement for founders who don’t want to pursue traditional VC funding.

Calm Company Fund

Calm Company Fund Invests through their SEAL (Shared Earnings Agreement) to align the interests of investors and founders in various outcomes while giving founders full control of their business and keeping as much optionality as possible open for the business.

Acumen

Acumen is an impact investment fund that invests in impact-driven businesses that prioritize social good over financial returns. The fund’s core focuses include companies working towards clean energy in East Africa and agriculture startups combating climate change.

Tinyseed Accelerator

Tinyseed is an accelerator for B2B SaaS companies that don’t want to go the traditional VC route. The accelerator is 1 year long and fully remote. Founders receive mentorship, community, and funding ($120-220k for 10-12% equity) without the pressure to IPO.

There is nothing wrong with ambitious founders looking to build a big, VC-backed company. But there’s also nothing wrong with building the next $10M/year company that pays dividends to investors and allows founders to reap the rewards of their hard work upfront.

If you want to build the latter, consider patient capital as a funding option!

Opportunities closing this week

1. BK-XL - Based in Brooklyn, BK-XL is an early-stage, industry-agnostic startup accelerator program focused on supporting underrepresented founders. The accelerator is powered by the Joe and Clara Tsai Foundation’s Social Justice Fund.

   Apply here: https://bk-xl.com/

2. Google Cloud RISE Summit - 2 days of free learning, enablement, and community engagement for minority-owned businesses.

   Apply here: https://rsvp.withgoogle.com/events/rise-summit-24/home